FIFTH CIRCUIT SERVES RESTAURANT EMPLOYERS A SECOND CHANCE FOR INJUNCTION AGAINST DOL’S NEW “TIP CREDIT” RULE

 

In a win for restaurant employers using “tip credit” to pay employees, the U.S. Court of Appeals for the Fifth Circuit ruled that a Texas District Court erroneously denied a preliminary injunction against enforcement of a rule that causes “irreparable harm” to employers. In the 2-1 opinion, the Fifth Circuit panel reversed the decision against the Restaurant Law Center and Texas Restaurant Association in the groups’ action against the U.S. Department of Labor (DOL), and sent the matter back to the lower court for further proceedings consistent with its ruling.

Generally, employers are required to pay nonexempt workers at least the minimum wage of $7.25 per hour. However, the Fair Labor Standards Act (FLSA) allows an employer to satisfy a portion of its minimum wage obligation to a “tipped employee” by allocating a partial credit, known as a “tip credit,” toward the minimum wage based on the amount of tips an employee receives. This allows the employer to pay a direct cash wage as low as $2.13 per hour, provided they make up the difference with tips earned by and paid to the employee. Tip credit is used extensively in the restaurant and hospitality industries to manage high up-front labor costs. However, proper compliance with tip credit can be complex and mistakes are common.  

In 2021, the Biden Administration’s DOL introduced a new rule that further complicated the use of the tip credit method for employers. Under the “80/20” and “continuous 30-minute” provisions, if an employee spends more than 20% of their time or 30 continuous minutes doing non-tip-producing work, the employer cannot utilize tip credit and is required to pay at least the full minimum wage. DOL makes clear its hostility to the tip credit method of payment and its intent to discourage its use and vigorously investigate any allegations of noncompliance.

In February 2022, the U.S. District Court for the Western District of Texas denied a motion for a preliminary injunction filed by the Restaurant Law Center and Texas Restaurant Association. In its ruling, the District Court did not reach the merits of their claims against the rule, but instead held that Plaintiffs “had failed to show they were irreparably harmed by the costs of complying with the new rule” and found the additional costs of time monitoring and recordkeeping were “purely speculative.” “overstated,” and “unspecific.”

The Fifth Circuit panel majority held that the District Court ignored well-established precedent that “non-recoverable compliance costs for ongoing managements costs to ensure compliance with the 80/20 and continuous 30-minute provisions are usually irreparable harm.” The opinion noted that Plaintiffs’ witnesses testified that managers must incur an additional 8-10 hours of time a week to comply with the rule, and the DOL conceded that compliance costs nationwide would be $177 million annually. 

The majority strongly described the DOL’s arguments that the new rule did not impose new recordkeeping requirements on employers as “meritless.” The court stated:

To claim the tip credit, employers must “ensure that tipped employees are not spending more than 20 percent of their time on directly supporting work, or more than 30 minutes continuously performing such duties.” We cannot fathom how an employer could honor these specific constraints without recording employee time. What if an employer is investigated by the Department or sued by an employee for wrongly claiming the tip credit? Without time records, how could an employer defend itself?

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In the same vein, the Department also claims that “employers need not engage in ‘minute to minute’ tracking of an employee’s time in order to ensure that they qualify for the tip credit.” No explanation is given (nor can we imagine one) why an employer would not have to track employee minutes to comply with a rule premised on the exact number of consecutive minutes an employee works. The Department also assures us that a “30-minute uninterrupted block of time . . . can be readily distinguished from the work that surrounds it. Maybe so, but that does not remove an employer’s need to account for blocks of employee time, especially if an employer is accused of violating the rule.

Finding that the restaurant Plaintiffs met their burden of showing irreparable harm, the case will return to the the District Court to determine if the Plaintiffs can meet the remaining tests for a preliminary injunction and succeed on the merits of the case.

In October 2022 while the appeal was pending, the case was reassigned from Judge Robert Pitman to Judge David Ezra. Prior to the Fifth Circuit ruling, both the DOL and the restaurant Plaintiffs filed motions for summary judgment which have yet to be ruled upon.

Please contact Mark Fijman or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice or guidance on labor and employment issues in the restaurant or hospitality industry.

SURPRISE RULING ON FLSA OVERTIME RULE

It continues to be a season of surprises in American politics . . . and in employment law.  Who would ever have thought that a federal judge, appointed by President Obama, would throw a money wrench in a key initiative of the Obama Department of Labor?  Not me.  As I incorrectly predicted in my November 18, 2016 article, I fully expected U.S. District Judge Amos L. Mazzant III to shoot down an injunction aimed at blocking the December 1, 2016 implementation of the DOL’s Final Rule, bumping the minimum salary level for white collar exemptions under the Fair Labor Standards Act ("FLSA") from $23,660 annually ($455 per week) to $47,476 annually ($913 per week).

What instead happened was that Judge Mazzant entered a nationwide preliminary injunction on November 22, 2016, blocking for now the U.S. Department of Labor (“DOL”) from implementing significant changes to the overtime rules applicable to white collar employees.  The ruling out of the U.S. District Court for the Eastern District of Texas held that the DOL most likely exceeded its authority by doubling the salary requirement, which would have rendered essentially meaningless the duties test, which is actually written into the FLSA.

The issuance of an injunction means that implementation and enforcement of the Final Rule by the DOL is just on hold until further notice by the Court.  The DOL has not yet announced whether it intends to appeal the ruling, and it remains to be seen if the Trump administration would have any interest in trying to implement a Rule so unpopular within the business community.  Another potential option might be a revised Rule that would include a smaller increase in the minimum salary requirement.

What I think I did get correct was my observation that “[i]f the unlikely actually happens, I expect an enormous sigh of relief from many employers, tinged with annoyance and aggravation over six months spent preparing for a rule that never went into effect.”  Annoyance aside, what should employers do at this point? 

In expectation of the December 1, 2016 deadline, many employers had bumped employee salaries to meet the new requirement, and many more had simply adjusted hour wages and work schedules in an effort to reduce overtime or keep actual wages approximately the same.  As reported in the Wall Street Journal, businesses are now faced with the difficult decision of either walking back pay increases they had already put in place, resulting in angry employees, or eating the expense of changes made in anticipation of a now uncertain requirement.

There is no right or wrong answer, and employers will have to look at a number of factors in making their decision for their particular business.  These factors include, but are not limited to: (1) whether the employer has already begun implementation of salary/exemption changes, (2) whether the employer has already communicated planned salary increases or changes even if it hasn’t actually put them in place, (3) whether the changes impact or potentially impact the company’s benefit plans, (4) the overall economic impact of the change to the client, (5) the workforce morale issues that may be implicated, (6) the temporary nature of the injunction and the fact that it could be appealed and, if so, potentially reversed on appeal.  This is an odd situation where those employers who planned ahead are faced with more issues than those companies that procrastinated and did nothing.

In response to reader requests, if you would like to receive the latest articles from "The Employee With The Dragon Tattoo" by e-mail, please send your name, your company, and your e-mail to me at fijmanm@phelps.com.  

RULING EXPECTED NEXT WEEK IN LEGAL CHALLENGE TO INCREASED SALARY REQUIREMENT FOR FLSA “WHITE COLLAR” EXEMPTIONS

Back in May 2016, the U.S. Department of Labor ("DOL") issued its final rule, bumping the minimum salary level for white collar exemptions under the Fair Labor Standards Act ("FLSA") from $23,660 annually ($455 per week) to $47,476 annually ($913 per week). With the new standard slated to go into effect on December 1, 2016, employers have spent the last six months scrambling on how to comply with the new rule, which makes millions of formerly exempt employees now eligible for overtime under the FLSA.

 

Options available to employers include bumping employee salaries to meet the new minimum (not feasible in many cases), paying employees’ current salaries with overtime after 40 hours (increased expense), reorganizing schedules and workloads to avoid overtime, or adjusting hourly rates of pay to essentially maintain the same pay level by estimating potential overtime hours. For a more detailed explanation of the final rule, click on this link to read an article by my colleague Jessica Coco Huffman in Phelps Dunbar’s Baton Rouge, Louisiana Office. For a discussion and explanation of the FLSA white collar exemptions, click on this link.
 

However, 21 states filed a lawsuit against the DOL, seeking to block the implementation of the new salary requirement prior to it going into effect, because of the heavy burden it would place on state budgets An injunction hearing was held November 16, 2016 in the United States District Court for the Eastern District of Texas. At the hearing, issues addressed included the DOL’s authority to make the change, the appropriateness of a nationwide injunction, and the impact on the incoming Administration. Following the hearing, the federal Judge in the case stated he was taking the matter under advisement, and expects to have a ruling on the requested injunction on Tuesday, November 22, 2016.
 

Reading the tea leaves, I think it is unlikely the Court will issue the injunction this late in the game. The federal Judge hearing the case, Amos L. Mazzant III, is an appointee of President Obama, who initially pushed for the change. However, after our tumultuous roller-coaster ride of a political season, the only sure bet is to see what happens next Tuesday.
 

If the unlikely actually happens, I expect an enormous sigh of relief from many employers, tinged with annoyance and aggravation over six months spent preparing for a rule that never went into effect.

 

 

In response to reader requests, if you would like to receive the latest articles from "The Employee With The Dragon Tattoo" by e-mail, please send your name, your company, and your e-mail to me at fijmanm@phelps.com.  





Sandwich “Secrets” and Noncompete Agreements

The sandwich chain Jimmy John’s is getting some unwanted attention from the federal government amid reports that it requires its low-level employees to sign noncompete agreements as a condition of employment. The story was first reported by the Huffington Post, and it resulted in Congressional Democrats sending a letter to the Federal Trade Commission (“FTC”)  and the U.S. Department of Labor (“DOL”), describing the restrictive covenants as “clearly anti-competitive and intimidating to workers.”  The House Democrats are asking for the FTC and the DOL to investigate the sandwich chain.

Is Jimmy John’s doing something illegal by making its sandwich-makers sign noncompetes?  The answer is “no.”  A better question to ask is whether it’s a good idea, and the answer to that is “not really.” 

In most states, this type of “restrictive employment covenant” is generally not favored, but will be enforced by the courts if the terms of the agreement are reasonable under the particular circumstances.  Generally, there are three requirements: (1) the employer has a valid interest to protect; (2) the geographic restriction is not overly broad; and (3) a reasonable time limit is given.  The employer bears the burden of proving the reasonableness of the agreement.  The reason these types of agreements are construed very narrowly is that most courts recognize that an employer is not entitled to protection against ordinary competition from a departing employee.

Despite the efforts to make this into a “federal case”, noncompete agreements are typically governed by state law, which can vary depending on where you live or operate a business.  For instance, in the state of Georgia, a noncompete agreement will be enforced only if the employee possesses selective or specialized skills, learning, abilities, customer contacts, customer information, and confidential information that that they have obtained as the result of working for the company.  In Tennessee, Texas and Maryland, such agreements are enforceable only against employees who had access to or were entrusted with the employer’s trade secrets or other confidential or proprietary information.  In other states, such as California, noncompete agreements are generally unenforceable.

In most of the matters I’ve handled involving noncompete agreements, the employees in question were either highly trained individuals in technical fields, with direct access to their employer’s trade secrets, or were high level sales people with similar access to confidential customer information.  The lesson to be learned is that the use of these agreements should be confined to key employees whose knowledge of trade secrets and other confidential information could cause serious damage if they went to work for a competitor.  I would be hard pressed to come up with a scenario where a fast food employer would legitimately need  to have a crew worker enter into a noncompete agreement. 

While I would be the first one to laud the attributes of a well-made sandwich, I think it’s fair to say that the average Jimmy John’s employee making your “J.J. Gargantuan®” is not privy to any company trade secrets.  By having low-level employees sign noncompete agreements, the company does not appear to be protecting any valid interest, and instead has brought itself some unwanted attention (and ridicule).

Mark Fijman is a labor and employment attorney with Phelps Dunbar, LLP, which has offices in Louisiana, Mississippi, Florida, Texas, Alabama, North Carolina and London. To view his firm bio, click here. He can be reached at (601) 360-9716 and by e-mail at fijmanm@phelps.com





Dept. of Labor Delays FLSA Enforcement and Penalties Against Home Healthcare Companies

             Employers in the home healthcare industry will be getting a brief delay in the enforcement of new regulations extending minimum wage and overtime requirements to home healthcare workers under the Fair Labor Standards Act (“FLSA”). 

The U.S. Department of Labor’s (“DOL”) final rule is scheduled to take effect January 1, 2015, but on October 7, 2014, the DOL announced it would delay enforcement and the imposition of penalties for a period of six months, or until June 30, 2015.  For the following six months, or until December 31, 2015, the DOL will exercise its discretion in determining whether to bring enforcement actions, based on the extent to which employers have made “good faith efforts to bring their home care programs into FLSA compliance.”

 It is important for employers to remember that despite the DOL's enforcement delay, they are still required to begin complying with the new rule as of January 1, 2015.

            Up until the new rule, the FLSA contained an exemption that employees providing “companionship services” to elderly persons or individuals with illnesses, injuries, or disabilities were not required to be paid the minimum wage or overtime pay if they met certain regulatory requirements.

            This change will result in nearly two million direct care workers, such as home health aides, personal care aides and certified nursing assistants falling under the requirements of the FLSA.  Business groups and Congressional Republicans had strongly pushed for a complete suspension of the new rule, expressing fears that it would make home healthcare unaffordable and result in disruption to patient care.  In explaining its reason for the additional delay in active implementation, the DOL noted:

When we announced the final rule, we provided a 15-month implementation period before its effective date. We did so out of recognition that home care services financing is complex, and that making adjustments to operations, programs and budgets in order to comply with the rule would take time. Some states, tell us that they’re ready to implement the rule. Others, because of budget and legislative processes, have requested an extension.  After careful consideration, the department decided to adopt a time-limited non-enforcement policy. This approach will best serve the goals of rewarding hard work with a fair wage while not disrupting innovative direct care services.

            For employers seeking more detailed information on the changes to the FLSA under the final rule, the DOL is providing an on-line fact sheet.

Mark Fijman is a labor and employment attorney with Phelps Dunbar, LLP, which has offices in Louisiana, Mississippi, Florida, Texas, Alabama, North Carolina and London. To view his firm bio, click here. He can be reached at (601) 360-9716 and by e-mail at fijmanm@phelps.com